Question

Pery Corporation produces and sells a single product. Data for that product are ase Sales price per unit Variables per unit Faed expenses for the month Currently selling $600.000 12.000 units Upper management is considering using a biodegradable packaging which co more per i butit produces less was in the long run Management plans to increase advertising by $10,000 in the first month to advertise this new feature to the packaging. They believe that environmentally friendly people wil witch to their product resulting in an increase in sales of 2.000 units per month What should be the overall effect on the company's m y operating income in the remot e change is implemente? O A increase of $80.000 On Decrease of 0000 OG Increase of $60.000 OD. Decrease of $50.000

Answer 1

Selling price per unit = $250

Variable cost per unit = $180

Fixed cost = $600,000

Number of units sold = 12,000

Profit = Sales - Variable cost - Fixed cost

= (12,000 x 250) - ( 12,000 x 180)- 600,000

= 3,000,000-2,160,000-600,000

= $240,000

New packaging will increase Variable cost per unit = $5

Hence, variable cost per unit = 180+5

= $185

Due to increase in advertising budget , fixed cost will increase by $10,000.

Hence fixed cost = 600,000+10,000

= $610,000

Sales volume will increase by 2,000 units

Hence, Sales volume after changes are incorporated = 12,000+2,000

= 14,000 units

Profit = Sales - variable cost - Fixed cost

= (14,000 x 250) - (14,000 x 185) - 610,000

= 3,500,000-2,590,000-610,000

= $300,000

Operating income increase of = 300,000-240,000

= $60,000

Correct option is c.

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